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Colocation 101 Plus Five Questions to Ask Colo Providers

By Dina Ferriero | Thursday, October 13th, 2011

Cloud computing is increasingly dominating the conversation in hedge fund and alternative investment technology, but it isn't right for everybody.  Some firms like the idea of keeping bulky equipment off-site but don't want to turn over complete control of services to a third-party.  Colocation can offer a happy medium-- multiple firms can share an off-site, centralized data center that houses their critical networking, storage, processing and communications equipment.Colocation Provider Questions Image

There are a number of advantages associated with colocation for hedge funds and other investment firms. For starters, a colocation facility provides continuity protection services, such as redundant power and cooling, fire suppression systems and security at all entry points. These added safeguards are especially compelling for funds that are located in dense urban areas, where commercial rent is high and offices are vulnerable to accidents or security breaches.

As with cloud computing, colocation allows firms to share the costs of maintenance and security for an off-site data center. However, there are a number of aspects in which cloud computing and colocation differ greatly, including:

  • Cloud strategies virtualize data and processing from multiple clients across shared equipment. Individual firms do not own the equipment.

  • Colocation facilities, however, assign specific rack space, cabinets and locked cages to secure each firm’s equipment in an isolated manner.

  • Cloud computing is typically priced on a per user per month basis.

  • Colocation is priced as recurring fees per rack, cabinet or other unit of space allocation.

Is Colocation Right for Your Firm?

Whether colocation makes sense for a particular fund is often dependent upon its strategy. For instance, high frequency traders must know the precise latency levels that their strategies can tolerate, as even the smallest millisecond of downtime could be detrimental to the business. This may eliminate the colocation option which offers attractive features and pricing, but may not be able to deliver the responsiveness required as facilities are usually located away from an exchange. By contrast, a long-short equity fund that trades less frequently may be more suited for a colocation facility in a remote location.

Choosing a Colocation Facility Provider

Selecting a colocation vendor calls for extensive research, including an in-depth visit to the facility itself. Seeing the site in person and speaking candidly with the vendor will reveal:

  1. the level of security (including personnel, cameras and digital security);

  2. whether there is adequate backup power; and

  3. whether the equipment appears to be well-maintained.

A knowledgeable representative from your firm should examine the vendor’s documentation to determine whether it is complete and current. Review SAS 70 audits to confirm certification as well. A rigorous examination may seem daunting for a hedge fund who is primarily focused on investing, but it is extremely important. In some cases, it may be helpful to ask for references from the facility’s clients. Additionally, seek guidance from your prime brokers as well as from technology outsourcing providers who have much more experience and expertise in this area.

When evaluating colocation providers, be sure to ask these 5 important questions:

Colocation is a viable option for many hedge funds and alternative investment firms. They offer a number of technological advantages including redundancy, security, cost-effectiveness, flexibility and ongoing maintenance and support. Before making the decision to move your technology elsewhere, be sure to perform an in-depth analysis of your options and remember to include these critical questions when evaluating colocation providers. 

Don’t miss these related articles for more information on colocation and how it could benefit your firm:

For more information on Eze Castle’s colocation services, please contact us.

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